Money Maker or Money Loser? The Dilemma of Membership Free Shipping

38 Pages Posted: 13 Aug 2016

See all articles by Xue (Jane) Tan

Xue (Jane) Tan

Indiana University - Kelley School of Business

Yi-Chun (Chad) Ho

George Washington University - School of Business

Yong Tan

University of Washington - Michael G. Foster School of Business

Date Written: August 8, 2016

Abstract

Free shipping policy is widely used by e-tailers to improve customers’ online shopping experience. In this paper, we study two shipping policies that are intensively used in the current electronic market: membership free shipping (MFS) and contingent free shipping (CFS). In MFS, consumers pay a membership fee upfront and enjoy unlimited, free expedited shipping for a certain period, whereas in CFS, consumers are eligible for free standard shipping if the total transaction amount of an order exceeds a pre-determined threshold. We develop a game-theoretical model in which two competing e-tailers choose their shipping strategies in a sequential order to maximize their profits. Our main findings are threefold. First, when both e-tailers use the same shipping policy, MFS leads to a higher profit than CFS if faster shipping is employed. Second, while e-tailers have an incentive to adopt MFS, under some conditions they find themselves in the prisoner’s dilemma — both e-tailers end up choosing the less profitable CFS. Third, such a prisoner’s dilemma no longer exists when consumers’ valuation of expedited shipping offered by MFS is sufficiently higher than that of standard shipping attached to CFS. This study contributes to the literature on shipping pricing and provides useful implications for e-tailers.

The Online Technical Appendix for this paper is available at the following URL: http://ssrn.com/abstract=2820355

Keywords: free shipping, electronic commerce, retail competition, game theory, membership free shipping, contingent free shipping

Suggested Citation

Tan, Xue and Ho, Yi-Chun (Chad) and Tan, Yong, Money Maker or Money Loser? The Dilemma of Membership Free Shipping (August 8, 2016). Available at SSRN: https://ssrn.com/abstract=2820238 or http://dx.doi.org/10.2139/ssrn.2820238

Xue Tan (Contact Author)

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

Yi-Chun (Chad) Ho

George Washington University - School of Business ( email )

Washington, DC 20052
United States

HOME PAGE: http://business.gwu.edu/chad-ho

Yong Tan

University of Washington - Michael G. Foster School of Business ( email )

Box 353226
Seattle, WA 98195-3226
United States

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